Tuesday 20 February 2018

Strong risk of bank run here 'if ECB rejects Greek bonds'

World's largest bond fund warns of grave consequences if Greece is denied liquidity

Emmet Oliver, Deputy Business Editor

THE world's largest bond fund has warned that Ireland and Portugal would be vulnerable to bank runs if the ECB no longer accepted Greek bonds as collateral in exchange for loans.

Pimco, one of the largest purchasers of bonds in world markets, said the ECB was insisting that it could never accept Greek bonds in exchange for loans if those bonds had defaulted.

Based on the current policy, the company said, this could lead to a withdrawal of liquidity from Greek banks.

"A withdrawal of ECB liquidity would therefore trigger a bank run in Greece and raise the odds of something similar occurring in Ireland and Portugal,'' said the fund's European strategist Myles Bradshaw.

"The first problem for Greek banks is the ECB's insistence that Greek bonds would be ineligible as collateral in a repo-transaction if downgraded to a selective default. This is a big deal as Greek banks currently borrow €98bn,'' said Mr Bradshaw.

Mr Bradshaw, based in Pimco's London office, said there were other options if the ECB maintained its current ban on ever accepting defaulted bonds.

"The policy response here is relatively straight forward,'' he said. One of the options would be for Greek banks to be funded by the local authorities in Greece, in the same way that Ireland's Central Bank funds lenders here.

Mr Bradshaw said collateral for these loans could be different to the collateral normally given to the ECB. Bradshaw said, in a piece about what might happen over the next few weeks of the debt crisis, that Greek banks were likely to need recapitalisation no matter what takes place.

"Greek banks are not marking Greek government bonds to market and hence retain the fiction of healthy regulator capital,'' he remarked, adding that unless Greek banks were forced to take on more capital, steady outflows of deposits would continue and confidence would ebb. "The ideal policy response would be a recapitalisation of the Greek banking system alongside a sovereign debt restructuring.

"Ideally the money would be invested directly in the banks by an EU entity, such as the European Financial Stability Facility,'' he added. Mr Bradshaw said the main aim of policy should be to avoid a "disorderly'' default by Greece or its banks.

See Focus: Page 7

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